Microeconomics
Microeconomics is a branch of economics that studies how the individual parts of the economy, the household and the firms, make decisions to allocate limited resources. It examines how the decisions that these distinct parts make affect the supply and demand for goods and services. Markets A market is anywhere goods and/or services are traded. A market could be a store, a website, or even someone's garage. In a market buyers and sellers agree to an, or there is already a set, equilibrium price and quantity that they then trade, so everybody gets what they want. This point can be shown as the intersection of the demand curve (relates pric e and quantity demanded by consumers/buyers) and the supply curve (relates price and quantity supplied by producers/sellers) and is known as the market equilibrium point. Consumer and producer surpluses are generated by market equilibrium. Surplus in this context has the same meaning as "added benefit". At equilibrium, there is part of the demand curve that is above the equilibrium price, and part of the supply curve that is below the equilibrium price (both of these are to the left of the equilibrium quantity). The consumers generate a benefit from not having to pay as high of a price for the good/service they are buying. This is the area bounded between the equilibrium quantity and the y-axis, and the equilibrium price and the y-intercept of the demand curve. The producers generate a benefit from being able to raise their price and get more revenue. This area forms a triangle directly below the consumer surplus. Elasticity : Main Article: ''Elasticity Theory of the Firm : ''Main Article: ''Theory of the Firm Market Failure Market failure is defined as any situation in which the suppliers in a market fail to allocate resources, and therefore goods and services, efficiently. What is considered allocative efficiency depends on many factors, because of things called externalities. Externalities are costs that third party individuals, so not the producer/seller of the good or the consumer/buyer of the good, have to endure because of either the production or the consumption of the good. For instance, pollution is the classic example of a ''negative externality because it damages the health of people living near it and destroys the beauty of the previous surroundings. An example of a positive externality could be flowers planted in someone's front yard, because they beautify the planter's yard. Market failure can occur when a good produces either a positive or negative externality, is sold in a non-competitive market, or is a public good. A non-competitive market is defined exactly the way it sounds- the firms in the market do not compete with one another and therefore are not being efficient in production. A public good is a good that is non-rivalrous (meaning its use does not decrease the benefit of another user) and non-excludable (meaning its use does not prevent others from using it) in consumption. Examples are the pleasure associated with watching the sun set, a cool breeze on a hot day, national defense, etc. Whenever the market for a good falls into one of the previously listed scenarios, there is market failure. Positive externalities are said to be "produced at a lower quantity and a higher price than they should", while negative externalities are said to be "produced at a higher quantity and a lower price than they should". These two statements are derived from market demand and supply curves of the good being bought and sold. If producers of goods with positive externalities were given subsidies as a reward for producing the good, the supply of the good would increase, creating a new equilibrium with a lower price and higher quantity. If producers of goods with negative externalities were forced to pay taxes as a penalty for producing the good, the supply would decrease, creating a new equilibrium with a higher price and a lower quantity. Non-competitive markets tend to set the equilibrium at whatever price and quantity they want because they don't care because they're not in competition with anyone else. Public goods, since they are non-rivalrous and non-excludable tend to be provided by the government because it is impossible to put a price on how much the individual should have to pay for things like national defense. Category:Microeconomics Category:Economic Basics